Investors usually dip into mid cap stocks for their high growth potential; this is because companies outside of the FTSE 100 tend to be less researched, meaning their is a much higher chance of unearthing hidden gems.
Although there are small and mid cap managers who focus on value – meaning they invest in stocks where they feel the share price has been unfairly knocked – the majority that operate in this area of the market try to look for companies that they believe will grow to a much larger size in the future.
This approach normally means they are investing for capital growth and if they find a company that offers a dividend yield, then it is an added bonus.
At first glance, the headline yield of these mid cap stocks is lower than their larger rivals', but if these companies are growing, that can mean they have excess cash on the balance sheet that they can distribute out to their shareholders via dividends.
With this in mind, FE Trustnet asks leading mid cap managers which stocks they are backing for both growth and income potential.
RPC
Gervais Williams (pictured), manager of the CF Miton Multi Cap Income fund, is a fan of FTSE 250-listed RPC and says it will reward its shareholders in the future.
"The stocks I have picked don’t have great yields at the moment, but they are both well-placed to grow their dividends over time. The problem with FTSE 250 stocks that give you high yield is that they are already well-known at the moment, so it is hard to find a knockout dividend stock," he said.
"One I like is RPC, the plastic packaging company. They had a period of slow earnings but the most recent statement from the management team suggests that things are picking up."
"It has a very strong market position anyway, but the accelerated growth should add to the business’s already good cashflow. I think there is a really good chance it can deliver dividend growth."
"The share price has come off a bit recently as well, so now is a good entry point," he added.
RPC’s current dividend yield is close to 3.5 per cent. The firm is probably best known for making bottles for Heinz tomato ketchup and Nivea sun cream.
The stock itself has performed well recently. According to FE Analytics, it has returned 236.42 per cent over five years while the FTSE 250 index has returned 106.04 per cent.
However, as Williams pointed out, the share price has taken a battering over the past few months. Year to date, investors in RPC would have still made money this year but not as much as the wider index.
Our data shows there are eight funds in the IMA universe that count RPC as a top-10 holding. Two of these are John McClure’s Unicorn UK Income fund and Giles Hargreave’s Marlborough Special Situations portfolio.
Berendsen
Williams is also a fan of textile maintenance company Berendsen.
"It is a textile rental company and supplies hospitals with things like bed and table covers," he said.
"It is a very good company, but I think people see it as a bit dull. It has been through a significant period of operational efficiency, basically paying off debt."
"It is now generating a lot of free cash so not only does it have the capabilities to beat earnings expectations, but it should be able to grow its dividend," he added.
Berendsen is London-based and has a market cap of more than £1.3bn. Its current yield is just over 4 per cent.
The stock has performed well recently, up 66.69 per cent over the past year compared with 37.44 per cent from the FTSE 250.
Performance of stock vs index over 1yr
Source: FE Analytics
There are six funds in the IMA universe that hold the textile services firm in their top-10. FE Alpha Manager Simon Haines has 5.3 per cent of his Threadneedle UK Mid 250 fund in the company, for example.
MoneySupermarket
MoneySupermarket is a price-comparison website that allows users to compare the price of credit cards, loans and mortgages, for instance. It has a market cap of more than £1bn and a dividend yield of 2.8 per cent.
Chris St John (pictured), manager of the AXA Framlington UK Mid Cap fund, highlights MoneySupermarket as a stock that is well-placed to increase its net distribution over time.
"Capital discipline is key with mid cap dividend-payers," he said. "In order for any company to grow its dividend, it needs to be able to grow its post-tax earnings and without that, its dividend won’t be sustainable. I would never start by looking at the highest-yielding stocks, because they may not be well covered."
"One that could be able to grow its dividend over time is MoneySupermarket. Being an online business, they are able to grow their earnings without having to reinvest their capital as much as others."
"That should lead to more cash on the balance sheet that could be paid out to investors," he added.
The company has returned 94.87 per cent since it was first listed in July 2007.
Performance of stock since July 2007
Source: FE Analytics
However, as the graph shows, it took a hit in the latter part of 2007. An investor who bought shares in MoneySupermarket in November 2007 would have had to wait more than four years to make their money back.
There are three IMA funds that hold the price-comparison website in their top-10, including FE Alpha Manager Harry Nimmo's Standard Life UK Smaller Companies fund.
